Regulation of Capital Adequacy in European Banking

Subject: Economics
Pages: 24
Words: 6557
Reading time:
24 min
Study level: PhD


Over the past few years, the European banks have struggled to gain traction from the negative impact of the 2008/2009 recession. Subsequently, most European countries are characterized by slow economic growth in addition to tightening the regulatory environment (Putnis 2014). Furthermore, banks are under intense pressure to minimize risk and improve their capital buffers. These requirements have increased the need for effective regulatory mechanisms (Ferran 2012).

This paper focuses on some of the measures adopted by the European banks. Specifically, the paper examines the Internal Capital Adequacy Assessment Process [ICAAP] and the Supervisory Review and Evaluation Process [SREP] implemented by the national regulator across different Eastern European countries. The regulatory framework varies from one country to another. The countries examined include Russia, Kazakhstan, Ukraine, Belarus, Poland, Czech Republic, Romania, Moldova, Bulgaria, Hungary, and Slovakia.

The functioning of ICAAP and SREP in individual countries


The Russian banking sector is comprised of approximately 1,000 banks, which makes it very competitive. However, over 80% of the industry is controlled by 50 state-owned banks (International Monetary Fund 2011a). It is estimated that over 20% of the banks currently face the risk of collapse due to the negative effects of the economic recession. A study conducted by the Centre for Macroeconomic Analysis and Short-Term indicates that over 200 banks are facing the risk of collapse due to poor capital management, which has led to bad loans (Hirst 2015).

To protect the banking sector, the Russian government injected over $2.4 billion into the various financial institutions within the country. Some of the banks that received the funding include the largest state-owned lenders, viz. Gazprombank and VTB. Hirst (2015, par. 6) asserts that the ‘state appears willing to support large institutions, but it is unlikely that the government will be as willing to use its fast-reducing reserves to provide a backstop for the sector as a whole. This assertion underscores the importance of effective banking regulation.

Internal Capital Adequacy Assessment Process at Russian banks

The Russian government has established comprehensive regulations that guide the banks’ operations through the Central Bank of Russia. Russia has adopted Pillar 1 of Basel III guidelines, which advocates the importance of calculating the capital ratio (Ernst & Young 2013). The decision to integrate Pillar 1 hinges on the need to improve the resilience and efficiency of the banking industry. According to the Bank of England (2013, par. 8), ‘capital adequacy amongst banks is achieved through the implementation of the Capital Adequacy Requirements. First, banks are required to comply with the set equity and capital adequacy requirements. The requirement entails the maintenance of an optimal N1 ratio, which involves the determination of equity capital to risk-weighted assets (Bank for International Settlements 2012).

In determining the N1 ratio, banks are required to include different components such as market and operational risk, credit risk on forwarding deals, and the credit risk associated with contingent credit liabilities (Brose et al. 2014). The minimum N1 ratio varies across different banks, and thus it is determined based on equity capital. However, the lowest N1 ratio permitted on non-bank-settlement credit institutions is 12%, while that applicable for non-banks that accept deposit and lending services is 15%. Conversely, non-bank credit institutions that do not have the deposit-taking right rather than transfer money are allowed to maintain an N1 ratio of 2% according to the Bank of Russia Instruction. It is projected that the increment in the minimum capital requirement will lead to a decline in the number of industry players.

The Overall Organisation of the Supervisory Review and Evaluation Process

The Russian government is increasingly concerned with operational efficiency in the banking industry. Consequently, the government is committed to upgrading the country’s legal framework, which is applicable to credit unions. The Central Bank of Russia has made significant efforts in implementing international approaches. The objective of the approach is to promote financial soundness in the country’s financial system. The supervisory of the banking sector is based on the Basel Committee on Banking Supervision [BCBS]. The BCBS outlines a set of instructions that banks are required to adhere to such as the required ratio.

SREP: Focus

The Russian Central Bank supervisory review mainly focuses on liquidity requirements, which have been in application since the 1990s under the Basel III requirements. The CBR focuses on ensuring that the banks have adhered to the set liquidity-coverage ratio. Additionally, the CBR was concerned with calculating the capital adequacy ratio and the capital amount for specific banks according to the No. 395-P of the CBR Regulation (European Banking Authority 2014). The CBR is committed to the continuous assessment of the banks’ capital adequacy ratio. Thus, the CBR has formulated a procedure that banks are required to follow in determining their capital and required ratio (The Central Bank of the Russian Federation 2013). Additionally, the government has outlined its commitment to ensuring that financial institutions comply with the compulsory public disclosure of their financial leverage indicator. This stipulation was effected on 1st January 2015 and it is expected to be applied through to 1st January 2018.

SREP: Methodological Focus Areas

One of the approaches that the CBR integrated into its pursuit to promote a healthy banking industry entails transparency. The decision to increase transparency was achieved by the implementation of Order No.OD-653, which explicitly outlines the consequences of non-compliance (Bank for International Settlements 2004). The Order further emphasizes the significance of financial institutions participating in the Deposit Insurance System [DIS]. The system requires the various banks’ regional branches to identify and inform the CBR of banks that do not comply with the various requirements of the DIS. According to The Central Bank of the Russian Federation (2013, par. 6), the CBR further published Ordinance No. 2803-U.

Invalidated the provisions that permitted banks to petition the Bank of Russia to evaluate their financial results without taking into account the expenses or losses due to their business expansion, to which the banks could attribute the fact that they qualify for financial rehabilitation.

The CBR is also implementing different international recommendations to foster financial soundness across the financial institutions. The CBR is primarily focusing on the recommendations specified by the Basel Committee on Banking Supervision [BCBS]. Banks are required to calculate the required ratios. Through this approach, the banks will be in a position to implement Basel II Pillar 1, which outlines the minimum capital requirements. Banks are also required to assess the credit risk that might be encountered in their operations.


The financial sector in Kazakhstan is very competitive as evidenced by the dominance of the private commercial banks. The private commercial industry ranks amongst the fastest-growing economic sectors in Kazakhstan. The sector’s growth has arisen from the improved macroeconomic environment. Consequently, the sector has a remarkable influence on the country’s overall economic performance. However, the economy is exposed to diverse challenges as evidenced by the impact of the recent financial crisis. Some of the notable challenges arise from insufficient capitalization and ineffective risk management practices.

The Kazakhstan National Bank has implemented several measures aimed at improving the banks’ performance (Zawya 2015). One of the notable changes entails the restriction of banks from exceeding their overseas bank deposits by over 30% (Tengri News 2008). However, the banks are offered cheap funding and a tenge rate of stability.

Internal Capital Adequacy Assessment Process at Kazakhstan

Kazakhstani banks are currently undergoing the transition phase, which has been spurred by the adoption of Basel III standards on 1 January 2015. The introduction of Basel III standards will be undertaken in phases. Tengri News (2008, par. 3) asserts that this move will ‘require the creation of countercyclical buffers, which would allow national regulators to require up to another 2.5% of capital during periods of high credit growth. Furthermore, the transition will further require improvement in the capital requirement. It is projected that the second-level banks will undergo the transition successfully.

The government’s decision to implement the capital adequacy requirements has arisen from the need to improve the banks’ resilience. The national regulator intends to implement Basel III by increasing the banks’ level of capitalization. The calculations by the National Bank of Kazakhstan aid in determining the capital adequacy level of specific banks by their risks. Subsequently, the NBK is in a position to determine the banks’ capital adequacy requirement.

The overall organization of the Supervisory Review and Evaluation Process

The NBK reviews the banks’ capital adequacy level and buffers annually to determine their sustainability and future competitiveness. The review process mainly entails a qualitative and quantitative assessment of the banks’ performance. The NBK has set its capital and minimum core capital requirement at 12% and 7% respectively. The NBK undertakes supervisory capital add-ons depending on the banks’ risk profile. Subsequently, the banks are in a position to implement the desired internal control system. Additionally, the Kazakhstan government is in the process of introducing financial instruments that comply with the Basel III criteria. According to the International Monetary Fund (2013, p. 12), examples of such instruments include ‘cumulative preferred stocks, subordinated debts, and convertible bonds’.

SREP: Focus

The NBK has formulated an agency, which is responsible for overseeing the attainment of the Basel III capital adequacy requirement. This agency mainly focuses on capital to ensure effective supervision and avert regulatory arbitrage within the country’s banking system. The agency is focused on the various capital tiers. From 2013, the agency outlined its resolve to integrate common equity comprised of paid-up common shares and the banks’ reserves to be used in covering risks. Moreover, Kazakhstan announced the decision to restructure Tier 2 and Tier 3 to improve capital adequacy. Tier 2 was restructured by including diverse hybrid capital instruments excluded under tier 1. Additionally, analogous adjustments were implemented to tier 1 and by increasing the dynamic reserves by 1.25% of the risk-weighted assets, while subordinated debts were to be included to tier two by the prevailing requirement (International Monetary Fund 2013).

The Kazakhstani government is also committed to implementing several Basel Committee recommendations, which were affected in 2013. First, the NBK is required to introduce a new ratio in determining common equity adequacy. International Monetary Fund (2013, p. 14) indicates that the ‘ratio is required to be 4.5%, which is an increment from the 2% level and to include a 7% conservation buffer’. Secondly, the committee recommended banks set the level of equity capital adequacy at 6%, which is an increment from the previous 4% under the Tier 1 requirement.

International Monetary Fund (2013, p. 14) adds that an additional ‘increment of 8.5% is to be included in the conservation buffer’. Conversely, the capital adequacy ratio was set at a uniform level, which applies to all banks irrespective of their nature. The minimum capital requirement further proposes the conservation buffer be increased from 8% to 10.5%. However, the determination of the countercyclical buffer will be based on the prevailing economic cycle (International Monetary Fund 2013).

SREP: Methodological Focus Areas

The NBK is charged with the responsibility of implementing effective regulation within the banking industry. Consequently, the government has implemented an effective capital management system. This goal has been achieved through the adoption of the stress testing methodology within the entire banking system. The stress testing methodology is implemented as an early warning system by assessing the banks’ financial performance under diverse stress scenarios, for example, falling real estate prices and currency depreciation. According to Podlich et al. (2010, p. 18), some of the core institutions in ‘the implementation of the stress testing methodology include the National Bank of Kazakhstan, the Financial Supervisory Agency [FSA], and the National Analytical Centre of the Government’.

Podlich et al. (2010, p. 20) add that the ‘implementation of the stress methodology is undertaken through the integration of two main stress-testing tools, which include the ‘top-down’ and ‘bottom-up’ approaches’. The top-down approach is implemented through the integration of a set of questionnaires, which are administered to all the banks. The questionnaires are aimed at collecting raw data, which enables the central bank to determine the respective banks’ risk positions (Podlich et al. 2010).

The application of the top-down approach provides the central bank with an opportunity to develop broad scenarios depending on diverse macroeconomic variables. Subsequently, an organization is in a position to determine the extent to which the financial institutions are impacted by macroeconomic shocks. Specifically, the top-down approach enables the regulatory bodies to assess the financial institutions’ credit risk. Podlich et al. (2010, p. 32) posit that the Agency of the Republic of Kazakhstan, which is ‘charged with the responsibility of regulation and supervision of the country’s financial sector, applies the top-down approach.

On the other hand, the bottom-up approach is focused on determining the financial institutions’ risk position. The approach usually relies on the respective financial institution methodology. Subsequently, Podlich et al. (2010, p. 33) conclude that the adoption of the ‘bottom-up approach enables an organization to develop a precise picture of the potential risks and its effectiveness in utilizing internal risk models’. However, the bottom-up approach does not provide banks with an opportunity to engage in comparable risk evaluation. The questionnaire mainly focuses on several indicators used in determining the banks’ financial stability. The core indicators include liquidity, earning and profitability levels, capital adequacy, risk concentration, and asset quality (Podlich et al. 2010).


Moldova has managed to maintain a well-organized two-tiered banking system, which is comprised of commercial banks and the National Bank of Moldova (NBM). One of the core functions of the NBM is to ensure effective supervision of the country’s banking sector. The regulatory mechanism within the sector has been developed through collaboration between the IMF and the USAID (FinCom Bank 2015).

Internal Capital Adequacy Assessment Process at Moldova banks

The NBM is largely concerned with maintaining an effective banking sector by keeping optimal capital adequacy levels. The NBM achieves this goal through the integration of strict prudential norms. First, the NBM requires banks to ensure that their financial reporting is aligned with the International Accounting Standards. Moreover, FinCom Bank (2015, par. 13) posits that the ‘banks have to maintain a capital adequacy level of 12% and these approaches have made ICAAP within the country more rigorous’.

The Overall Organisation of the Supervisory Review and Evaluation Process

The NBM undertakes a supervisory review and evaluation process on the 16 commercial banks in partnership with other regulators such as the IMF and USAID. The regulator assesses the banks’ lending capacity regularly. The findings are reported to the NBM, which implements the necessary changes.

SREP: Focus

In the course of implementing SREP, the NBM has adopted a risk-based capital adequacy approach. All 16 banks operating in Moldova are required to adhere to the set minimum capital requirement. The NBM assesses the banks’ capital requirements to determine their future capital requirement. Moreover, the bank undertakes extensive evaluation of the financial institutions’ risk profile to determine the applicability of the implemented ICAAP (FinCom Bank 2015). This approach provides the NBM knowledge on how to adjust the banks’ capital management.

SREP: Methodological Focus Areas

The NBM applies the going concern approach in assessing the banks’ risk profile. Under this approach, the NBM assesses the various pillar 2 risks that might affect the banks’ long-term operation. Some of the core risks evaluated include credit spread risk, interest rate risk, and business risk. The risk evaluation process is undertaken both qualitatively and quantitatively using different information obtained from the bank (FinCom Bank 2015).


The Ukrainian banking industry has been characterized by a series of boom and busts. One of the factors that have made the sector vulnerable entails growth in loans denominated in foreign currency. The 2008 financial crisis increased the sector’s vulnerabilities, which led to severe solvency and liquidity challenges. Deloitte (2015, par. 8) indicates that the country’s banking industry ‘is comprised of two main tiers, which include the National Bank of Ukraine and the commercial banks’. The country has 175 commercial banks, which are controlled by the National Bank of Ukraine [NBU]. The 2008 financial crisis forced the government to restructure the industry by nationalizing three state-owned banks (Deloitte 2015).

Internal Capital Adequacy Assessment Process at Ukraine banks

All banks in Ukraine are required to adhere to the set regulatory capital adequacy requirement, which is commonly denoted as N2. The NBU is committed to ensuring that banks improve their capital adequacy progressively. Banks are expected to raise their capital adequacy level to 5% by 1st February 2016 and 7% by 2017. The NBU intends to restore capital adequacy amongst financial institutions to the 10% pre-crisis level. The resolution was slotted to be effected on 15th May 2015.

NBU expects all banks to formulate and submit comprehensive plans outlining how they intend to eliminate infringement to the stipulated plans. The plan will be comprised of an effective restructuring or capitalization program and quarterly schedules outlining how the banks have complied with the requirement. The respective bank plans will be examined and approved under the watch of the NBU Board (Interfax Ukraine 2015a).

SREP: Focus

The focus of the NBU is to ensure that all the banks are capitalized optimally according to Basel III requirements. However, the Ukrainian banks are characterized by significant differences concerning capital ratio. The ratio amongst the 10 largest banks is estimated to be 12%. Thus, one can argue that the CAR amongst the large banks is relatively low. The CAR of 12% means that the large banks only maintain a 2% buffer, which is relatively low (Pavlenko 2014). This aspect shows that the ratio amongst the largest bank is worsening. Additionally, the low CAR indicates that the large banks in Ukraine are threatening the country’s financial stability. The capital adequacy ratio is an effective indicator of the level of solvency amongst the financial institutions (Bank for International Settlements 2011). In Ukraine, the CAR is estimated to be 14.8%, which is relatively higher than the set NBU ratio of 10%. This aspect means that the CAR has a reasonable buffer of 4.8% (Lachmund 2005). However, the violation of the capital requirement amongst the large banks underscores the need for NBU to ensure adequate capitalization (Pavlenko 2014).

SREP: Methodological Focus Areas

Ukraine is committed to implementing and promoting capital adequacy in the banking industry. In a bid to achieve this goal, the government, in collaboration with the International Monetary Fund, has implemented the Extended Fund Facility to determine and update stress tests effectively. The country initially focused on the 20 largest banks to determine their adherence to the N2 requirements. Banks with a capital adequacy of less than the set 10% will be required to present their capitalization plans periodically to assess their progress towards the set level (Interfax Ukraine 2015b).


The Belarus banking system is comprised of two main levels, which include the commercial banks and the National Bank of Belarus. The National Bank is charged with the responsibility of regulating the banks’ activities in addition to cooperating with the different regulatory bodies such as the Banking Supervisors in Eastern and Central European countries and the International Monetary Fund. By April 2013, there were 32 commercial banks, whose total capital was estimated to be 48,790.7 billion rubles (Ministry of Foreign Affairs of Belarus 2014). A study conducted by Moody indicates a negative image within the country’s banking system due to inadequate support by the government (Moody’s 2014).

Internal Capital Adequacy Assessment Process at Belarus Banks

SREP: Main Focus Area

In its supervision of the banking industry, the NBRB focuses on several areas, which include the banks’ risk management systems, compliance with prudential requirements, the implemented internal control mechanisms, and an assessment of the quality of banks’ assets quality. The banking supervisor, viz. the NBRB, has established the minimum capital adequacy requirements that aim at identifying the risks that individual banks face. The International Monetary Fund (2014, p. 63) posits that the ‘capital adequacy requirement further defines the various capital components and the banks’ capacity to absorb losses that occur’. The minimum capital requirements must comply with the Basel Capital Accord.

The examination of the bank’s operation is further undertaken by the Basel Supervision Department, which is a unit of the NBRB. The BSD is comprised of analysts, inspectors, and specialists. BSD focuses on the banks’ financial conditions, the adequacy of the financial institutions’ internal control systems, the degree of accuracy of the accounting transactions, and the banks’ compliance with the set prudential requirements. The NBRB undertakes on-site examination by assessing the banks’ financial capital adequacy, the level of liquidity inspection, risk administration and management, and liquidity inspection.

SREP: Methodological Focus Areas

The National Bank of Belarus has implemented substantial measures to promote its supervision of the banking industry by integrating international best practices. The NBRB requires individual businesses to undertake self-assessment using a set of questionnaires as outlined by the Basel Core Principles. Through the General Directorate for Banking Supervision [GDBS], the national bank has integrated a mixture of on-site and off-site analysis measures. The NBRB undertakes on-site examination through the Inspection Department after every two years (The World Bank 2006).

Furthermore, the National Bank of Belarus has integrated different methodologies such as auditing, using effective risk management practices, and internal and external auditors. The supervision of the banking industry is also achieved through the implementation of an effective legal framework, which is supervised by the NBRB Board.

The examination culminates in the creation of reports, which are forwarded to the banks’ management team. Another methodology integrated into the supervisory process entails a monthly and quarterly analysis of diverse qualitative and quantitative information provided by the respective banks.


According to White (2011, par. 9), the ‘Polish banking industry is ranked as the leader in the Eastern and Central Europe market’. Seventy percent (70%) of the banking industry is in the hands of foreign investors. White (2011, par. 10) adds that in total, ‘the industry has 49 banks of which 39 are foreign-owned, six are domestically owned, and four are state owned’. The sector was impacted negatively by the recent financial crisis. However, the industry depicted a relatively high degree of resilience despite the minimal support by the government. The resilience has mainly been necessitated by the avoidance of risky business products. The prominent banks within the sector include Getin Holding, BRE Bank, ING Bank, Bank Zachodni, Bank Pekao, and PKO Bank. White (2011, par. 14) posits that the industry has been ‘characterized by a relatively high degree of consolidation through the formation of mergers and acquisitions.

The Commission of Financial Supervision [CFS] undertakes the banks’ supervision in Poland through the Supervision Act. The Commission recently implemented Basel III to increase onsite supervision within the sector. Furthermore, the Commission is further integrating sophisticated supervisory mechanisms, specifically the SREP (International Monetary Fund 2012).

Internal Capital Adequacy Assessment Process at the Polish banks

Capital adequacy has been integrated as one of the core principles of promoting stability amongst the Polish banks. According to the International Monetary Fund (2012, p. 17), from 2008, ‘Poland commenced the implementation of the Basel II framework by the provisions of the European Union Capital Requirement Directives, viz. Directive 2006/48/EC and 2006/49/EC respectively’. The adoption of the two directives has led to significant adjustments to the country’s Banking Act to align with the capital adequacy framework.

The Overall Organisation of the Supervisory Review and Evaluation Process

The Polish government has integrated a comprehensive framework to improve supervision within the banking industry. The supervisory framework is based on the country’s laws and the set supervisory requirements, which are commonly referred to as the SREP. The SREP is an effective review methodology that is comprised of a questionnaire aimed at assessing the banks’ annual performance. The CFS prioritizes the risky banks in its review (International Monetary Fund 2011b).

The SREP in Poland is mainly a self-assessment that does not take into account external verification. However, the SREP is mainly comprised of extensive coordination between the various internal and external resources. Furthermore, the CFS ensures a high level of expertise to improve the effectiveness of the supervisory tool.

SREP: Focus

The SREP focus area entails risks, thus making the SREP framework to be risk-based. In line with Pillar I, banks assess their diverse risk categories, viz. the credit risk, operational risk, market risk, and liquidity risk. The inclusion of the diverse risk categories has enabled the Polish National Bank to improve capital adequacy management continuously.

SREP: Methodological Focus Areas

The National Bank has integrated effective supervisory techniques, which include onsite and offsite supervision. The adoption of the SREP has reduced the inspection cycle from two to four years. Under the new SREP, inspection on the banks’ operation will mainly be undertaken when required. This approach will improve supervision within the banking industry. Therefore, the adoption of the self-assessment mechanism has played a considerable role in promoting the efficiency of the SREP. The implementation of the SREP is further enhanced through the integration of quantitative and qualitative techniques. The application of the two methodologies is achieved through the disclosure of quantitative and qualitative information regarding the level of capital adequacy amongst banks (International Monetary Fund 2012).


The Bulgarian banking industry has been characterized by moderate growth over the past years. According to Elana Trading (2014, par. 11), in 2013, ‘the total assets within the sector amounted to BGN 85.7 billion, which represents a 4% growth as compared to 2012’. Nevertheless, the amount of non-performing loans remained considerably high at 22.6%. Capital adequacy within the system has been relatively stable, as evidenced by the increment in Tier 1 capital adequacy ratio by a year-on-year ratio of over 6.1%. The sector ranks amongst the most favorable in the European Union system. Moreover, the regulatory authorities within the system are committed to improving capital adequacy by complying with the EU financial framework (Elana Trading 2014).

Internal Capital Adequacy Assessment Process at Bulgarian banks

The Bulgarian banks are required to maintain an acceptable capital adequacy ratio according to the Basel Capital Accord. The Bulgarian National Bank pressurizes banks to maintain the capital-adequacy ratio requirement at 10%. However, the bank intends to raise the capital adequacy ratio progressively (International Monetary Fund 2000).

The application of capital adequacy requirement is undertaken on a consolidated depending on the banks’ capital requirement. The Bulgarian National Bank assesses the banks’ risk profile periodically to determine their capital adequacy. The BNB has integrated the Risk Assessment System in its SREP, which enables it to prioritize the banks’ risks.

The Overall Organisation of the Supervisory Review and Evaluation Process

In the process of undertaking SREP, the BNB reviews the banks’ risk profile. The review takes into account all the risks outlined in the guideline on the application of SREP, which are issued by the BNB. The application of the SREP is undertaken on a priority basis depending on the banks’ risks.

SREP: Focus

The BNB utilizes the banks’ qualitative and quantitative data in assessing the individual risk profile. In its quest to improve its efficiency in supervising the banks’ operation, the BNB focuses on different types of risks. This approach aids in assessing the banks’ risk management systems. Subsequently, BNB can provide a detailed recommendation on the most effective adjustments to the banks’ capital-adequacy management practices by Tier 1 of the Basel Accord.

SREP: Methodological Focus

The application of the SREP amongst the Bulgarian banks is undertaken using different instruments and tools. The core tools applied include on-site examination, dialogue with the individual bank’s management teams, off-site analysis, and undertaking periodic prudential reporting. The BNB undertakes the SREP on an annual basis in line with the proportionality principle (International Monetary Fund 2000).

Czech Republic

According to the Czech National Bank (2015, par. 11), by April 2015, ‘there were 45 commercial banks in the Czech Republic. It is estimated that the total assets amongst the country’s banking sector as of April 2015 amounted to CZK 5,476 billion (Czech National Bank 2015). The Czech National Bank has developed an effective supervisory authority, whose core responsibility is to assess the performance of the financial institutions regularly. The CNB has established three main divisions, which include the supervision, enforcement, and regulation departments to establish a sound financial market. The departments aimed at improving the effectiveness and efficiency with which Pillar 1 and Pillar II of Basel II are entrenched within the country’s banking industry.

Furthermore, the banking sector has integrated Basel III principles to enhance capital requirements. This goal has been achieved through the integration of capital requirements. All banks have the responsibility to meet Tier 1 capital requirements.

The Internal Capital Adequacy Assessment Process at Czech banks

Czech banks are experiencing increased pressure from the CNB to maintain an adequate level o capital. For example, a reduction in the capital adequacy level by one-third from the stipulated requirement may force the CNB to withdraw the banks’ operating license. Subsequently, capital planning has become a fundamental component amongst Czech banks.

The Overall Organisation of the SREP

The supervision of the Czech banking industry is multifaceted, as evidenced by the inclusion of diverse components. First, the supervisory process takes into account the soundness of the prevailing macroeconomic situation and the financial system. Moreover, the regulatory process has further taken into account the effectiveness and efficiency of the legal and judiciary system in fostering the banking sector.

SREP: Focus

The CNB’s core responsibility is fostering capital adequacy within the country’s banking sector. The CNB assesses the ICAAP of the respective banks to determine the risks and the associated risk factors. CNB undertakes risk identification on an ongoing basis. The assessment is undertaken on individual banks to develop a risk profile effectively and determine the banks’ overall position. This approach enables the CNB to determine the extent to which the risk is significant to the banks’ long-term survival.

SREP: Methodological Focus Areas

The Czech National Bank has integrated stress tests in its pursuit to examine the resilience of the banking industry. The stress tests enable the CNB to evaluate the degree to which financial institutions are sensitive to diverse risks. Moreover, the integration of the stress tests enables the financial institutions to determine the impact of the risks on the bank’s capital adequacy. Through this approach, the CNB is in a position to determine the actual amount of capital that the respective banks within the country should maintain, thus making the necessary adjustments.


Currently, the Slovakian banking industry is comprised of 27 financial institutions. Most of the companies are members of the leading international banking groups, which include RZB Unicredit, Intesa, Sanpaolo, and Erste (Slovenska Bankova Asociacia 2015). Bank operations in Slovakia are regulated by the National Bank of Slovakia, under Act 747/2004. The industry has experienced significant shocks over the past few years due to negative economic changes in Europe (Moody’s 2013).

Internal Capital Adequacy Assessment Process at Slovakia banks

In its quest to undertake ICAAP on banks, the National Bank of Slovakia incorporates the proportionality principle. Moreover, the NBS has categorized the banks’ operations into two main groups, which include the large banks and the building societies, small, and medium-sized banks. The large banks are required to integrate complex mechanisms in assessing their internal capital adequacy while the other players have the discretion to incorporate simpler methods using Pillar I. However, the banks are required to assess and calculate the risks faced. The frequency with which banks undertake ICAAP depends on their respective risk profile.

The Overall Organisation of the Supervisory Review and Evaluation Process

The application of the SREP by the NBS is undertaken by assessing the banks’ governance and internal control systems, management system, and risk profile. Cub Banka (2013, par. 8) posits that the ‘implementation of the SREP is based on the proportionality principle. The principle assesses the prevailing differences amongst the financial institutions using three main criteria, which include the complexity and scale of bank operation, size, and nature.

The implementation of the SREP is undertaken collaboratively by considering the various regulatory authorities within the banking industry by Directive 2006/48/EC.

SREP: focus

The SREP is mainly concerned with assessing the risk faced by financial institutions. Subsequently, the banks are required to implement an effective risk assessment framework. The various risks assessed include market risk, operational risk, strategic risk, reputational risk, and liquidity risk. Risk assessment forms the basis upon which the NBS integrated the ICAAP. Moreover, risk assessment is undertaken using the individual banks’ internal models (Vub Banka 2013).

SREP: Methodological Focus Areas

The assessment of capital adequacy amongst the country’s financial institutions is undertaken by conducting both on-site and off-site supervision. Off-site supervision is undertaken by examining different reports on the banks’ performance such as internal auditors’ reports, financial statements, and the auditor’s reports. Moreover, the evaluation of risk is based on a standardized approach, which involves the determination of the Value at Risk. Using this method, the NBS is in a position to predict the future using historical changes. The implementation of the historical simulation method is undertaken in four main phases, which entail the identification of risk factors, the development of historical scenarios, the simulation, and the estimation of Value at Risk [VaR]. Another methodology applied entails the stress test method. By integrating these methods, the NBS is in a position to assess the respective banks’ level of risk and capital adequacy (Vub Banka 2013).


The Hungarian banking sector has undergone a considerable transformation over the past few years. For example, the Erste Group, which dominates the sector, announced its decision to sell 30% of its firm to the Hungarian government. Subsequently, the government will gain a higher control of the banking sector, which will create an opportunity for implementing the necessary reforms. Recently, the government integrated an additional tax to protect the sector from negative financial events such as the 2008 financial crisis (Byrne 2015).

Internal Capital Adequacy Assessment Process at Hungarian banks

Banks in Hungary are required to comply with Section 76/K of Act CXII, which obliges them to examine the suitability of their capital determination processes. Subsequently, the banks are required to integrate the ICAAP as a component of their internal governance. Under this requirement, the banks are required to undertake a full-scale assessment of the effectiveness and quality of their corporate governance mechanisms. Amongst the elements considered in the ICAAP entails the banks’ risk exposure (Hungarian Financial Supervisory Authority 2012).

The Overall Organisation of the SREP

The SREP is undertaken by a Supervisory Authority in coordination, with the individual banks’ supervisors, by Directive 2009/111/EC. The Supervisory Authority engages in comprehensive consultations with the various supervised authorities on different aspects, such as the degree of economic capital requirements. Moreover, the integration of this approach enables financial institutions to engage in joint risk assessment.

The joint risk assessment is undertaken by supervisory colleges, which are comprised of competent authorities. This organization aims at ensuring compliance with the stipulations outlined by the European Banking Authority. Through this approach, the Supervisory Authority is in a position to make the optimal decision on the banks’ adherence to Pillar II and capital adequacy (Hungarian Financial Supervisory Authority 2012).

SREP: Focus

Similar to most countries, the Supervisory Authority in Hungary mainly focuses on risk. The Supervisory Authority has incorporated the Risk Assessment System as the core internal supervisory tool. Through the RAS, the Hungary National Bank is in a position to monitor risk changes progressively. However, the successful implementation of the RAS is based on the data collected from the banks’ performance. The risk assessment process is broad, which means that it focuses on diverse risk categories such as credit and market risk. The results obtained are used to implement the necessary supervisory measures such as capital add-on requirements (Hungarian Financial Supervisory Authority 2012).

SREP: Methodological Focus Areas

Hungary has adopted a unique methodology in promoting ICAAP and SREP amongst the financial institutions. The discretion to determine the most appropriate methodology is left to the national supervisors. However, the national supervisors ensure that the methodology is aligned with the set rules, general standards, and guidelines. The discretion on the methodology is based on the need to ensure that the banks respond to the prevailing domestic and international economic environment effectively (Hungarian Financial Supervisory Authority 2012).


The Romanian banking sector ranks amongst the most profitable in Eastern and Central Europe. The sector is dominated by 40 banks. In 2013, over 23 banks reported high levels of profit, which was estimated to be 450 million Euros. Conversely, only 17 banks recorded a loss, which was estimated to be 340 million Euros. The National Bank of Romania recently restructured the industry to comply with the International Monetary Fund requirements (Mihu 2014).

Internal Capital Adequacy Assessment Process in Romanian banks

Over the past few years, Romania has embarked on the process of implementing Basel II. One of the major changes that have been implemented in the Romanian banking system relates to promoting internal capital adequacy. The Romanian government commenced the implementation of Pillar 2 in 2006. Under the new agreement, banks in Romania will be required to formulate effective procedures and strategies on how to promote internal capital adequacy. However, the procedures must take into account risks by the CNVM Regulation no. 13/18/2006, which outlines the minimum capital requirement. Moreover, banks must ensure that the risk assessment process is not limited to the capital requirement, but must also integrate diverse risk categories (Negrila 2006).

The overall organisation of the SREP

The SREP process in Romania is undertaken under the watch of competent authority by Directive 2013/36/EU. One of the departments entails the Supervision Department of the NBR. The banking supervisors assess the performance of the banks by evaluating the reliability of the implemented ICAAP, risk exposure, and the degree of capital adequacy. Moreover, the SREP is aligned with the Capital Requirement Directive [CRD], which enables the banks to determine the capital inadequacies effectively, hence providing insight on how to implement prudential measures. The competent authorities are required to publish the methodologies and the criteria used during the SREP according to Article 97 of the Directive (Banca Nationala a Romania 2015).

SREP: Focus

The SREP is mainly concerned with the evaluation of the strategies, mechanisms, and procedures adopted by the respective financial institutions. The result of the review provides the National Bank of Romania insight on the necessary adjustments to the banks, processes, mechanisms, and strategies. Moreover, the authority outlines the internal procedures to be applied in assessing the financial institutions’ ICAAP and risk profile. A comprehensive assessment of the risk profile is undertaken by considering the operation, concentration, reputational, and residual risks.

SREP: Methodological Focus Area

The SREP amongst the financial institutions in Romania is undertaken by integrating diverse methods. The core methods include the scoring matrix, on-site, and off-site supervision. By applying this methodology, the authorities are in a position to assess the banks’ risks by undertaking qualitative and quantitative methods.


The analysis above shows that different banks in Eastern and Central Europe are committed to improving their long-term survival, as evidenced by their focus on improving capital adequacy and integrating effective supervisory mechanisms. The analysis cites risk as one of the core areas that banks are focusing on managing their internal capital adequacy levels. The implementation of the ICAAP and SREP amongst the countries’ banking systems is achieved through collaboration between the individual banks and the national regulatory authorities such as central banks. This approach will enable the banks to sustain their minimum capital requirement at an acceptable level.


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